Story Stocks

I recently had a chance to discover first-hand the perils of what I like to call "story stocks". These are the types of stocks that are supported strictly by rumour, marketing and conspicuously well-timed press releases and feature newspaper articles. Usually, I avoid these stocks, as I tend to be somewhat of a value investor, in an informal sense, although I have been known to speculate with more moderate amounts. The one thing I always forget, however, is to get off the medium to long-term horizon and put on the short-term googles.

The case in point: Liponex (LPX.TO), a company with a single drug in Phase I/II testing trials. Their drug increases HDL, High Density Lipoprotein, or what is commonly called "good cholesterol", and is now moreso a contender due to the demise of Pfizer's torcetrapib HDL-raising drug, which showed an increased rate of mortality in test subjects. On the weekend, there was a glowing article in the Globe & Mail which summarized all this, and somewhat interested in these smaller stocks as pseudo-options, due to their low price (this had closed on the Friday at 1.54). On the Tuesday following, when the markets had re-opened after the New Year's, the stock climbed precipitously, in the 60%-70% range. The volume, normally in the low 5 digits, reached over a million shares traded. I managed to get in at the low end of the day and watched as my investment grew over the day and part of the next to achieve a 50% gain. Perhaps stupidly, I felt pleased, as if somehow I had been cleverer than most. Taleb would probably laugh in my face, if I were to purport it was skill.

Of course, you know where the story ends. After the market closed on Wednesday, the stock already drifting perilously close to my buy-in price, Liponex released news that there had been some "gastrointestinal adverse effects" in their trials when people on higher dosages took the drug, causing the drop-out rate of patients to be too high to continue the study at that dosage. This obviously wasn't great news, but was it enough to push it back to the starting line? I threw a stop limit order on it, wondering if it would get pushed to my price (a loss of 10% on the purchase if it filled), and went to sleep. Woke up, and I was out of the position, at a price higher than the actual trading range for the day (probably filled someone's market order).

What I learned, and should have known, is that if I get into a story stock, and I make gains, I have to get out before the story fades. I assumed that somehow I knew better about this speculation, that I was buying in because I figured this story was true. The fact is, I have almost no knowledge of how the trials are progressing. I don't know anything about their competitors. I don't know the efficacy of the drug, which could impact its appeal to the larger drug distributors that would buy or license it. I fell for the story, a victim of a pseudo pump-and-dump that probably let a few investors get out with some nice gains and left me holding the bag. So, if you want to invest in a story stock, with no revenues and negative earnings, go ahead, but be very aware that it's floating on a single thread -- the tale that's told.